AT&T’s Plan to Save T-Mobile Deal May Not Be Enough

AT&T (NYSE:T) is preparing to make concessions to address concerns raised by the Department of Justice that the T-Mobile deal is anti-competitive according to several reports. ^[1] The DOJ’s primary concern was that if this merger goes through only three companies AT&T, Verizon (NYSE:VZ) and Sprint (NYSE:S) would control 90% of the U.S. wireless market and make the telecom industry even more concentrated. This would result in less competition and higher prices for customers. AT&T may have to sell up to 25% of T-Mobile’s business, including spectrum and customers to address these concerns, which we believe still might not be enough to assuage the DOJ’s concerns.

Our $38.75 price estimate for AT&T stock is about 35% above market price.

Why such an arrangement is unlikely to be of any help…

According to Reuters quoting Bob Doyle, a former antitrust enforcer now in private practice, it would be difficult for AT&T to reach a settlement with the DOJ as the company would have to divest both national and regional assets. The only logical buyers for national assets would be Verizon and Sprint, but a purchase by either company (particularly Verizon) could raise more antitrust concerns. ^[1]

Moreover, even if AT&T succeeds in selling 25% of T-Mobile’s business, AT&T is not addressing the government’s concern of preserving a strong fourth competitor in the wireless market.

..Even though AT&T continues to fight

If AT&T’s planned acquisition of T-Mobile for $39 billion does not go through, AT&T will have to pay T-Mobile parent Deutsche Telekom an estimated $6 billion in cash and other assets including spectrum as a breakup fee. ^[2] AT&T desperately wants this deal to go through mostly for the additional spectrum that it will acquire, which will help expand capacity, improve service and give the company a competitive edge over Verizon.

AT&T has consistently argued that the U.S. wireless industry will remain competitive if the T-Mobile purchase were to gain federal approval. In expanding its 4G LTE network and merging the two companies’ wireless networks, AT&T has maintained that the deal would create jobs and generate economic growth.

See our complete analysis for AT&T stock here

1. AT&T prepares two-track plan to save T-Mobile deal, Reuters, September 2nd, 2011 [↩] [↩]
2. U.S. moves to block AT&T’s purchase of T-Mobile, Reuters, August 31, 2011 [↩]